A Complete Guide to Uniswap V3
introduce
introduce
In this article, we will introduce Uniswap v3 to automatically manage LP (Liquidity Provider) services.
There are various names such as Automated Liquidity Manager and Vault, but in this article, I want to unify them with Vault.
Uniswap v3 Vault will perform rebalancing and compounding management in v3 LPs instead of a portion of the LP Fee (Liquidity Fee) as a reward.
I will explain rebalancing later, but since it takes time and gas, it is recommended for DeFi users like me who have no money to use Vault (pool).
Please note that the content of this article is based on information as of writing, June 27th - July 3rd.
Policies etc. are likely to change, so it may become outdated information soon, but I hope it helps your operation.
Also, before getting into the text, I want to clarify that I support a range of products. I see Vault as a Uniswap v3-only investment fund, since its performance depends on the rebalancing strategy. Also, I started this article because I believe mutual funds need transparency.
What is rebalancing?
Uniswap v3 allows you to earn more fees than v2 by providing a narrow range of liquidity.
Therefore, those who want to earn commissions will provide liquidity in a price range close to the current price (hereinafter referred to as the range). Therefore, liquidity usually paints a mountain around the current price, as shown in the chart below.
Quote: https://info.uniswap.org/#/pools/0x8ad599c3a0ff1de082011efddc58f1908eb6e6d8
On the other hand, if the price is out of range, the liquidity provider will not be able to earn commission income. That is, the user must either wait for the price to return to the range, or bleed it once and re-flow in another range.
While the latter is called rebalancing, the v3 Vault aims to do it all together for everyone.
In addition, as a common advantage of Vault, each LP token issued by Vault can be in the form of ERC-20, so it is easy to use for mortgage and liquidity mining.
Organizational Rebalancing Strategies
Before we get into the introduction to Vault, Uniswap v3 LPs have different returns due to rebalancing, so I want to tease out the rebalancing strategy first.
how to rebalance
In the words of Charm Finance, there are two ways to rebalance: passive rebalancing and active rebalancing.
"Active rebalancing" is a method of adjusting the number of tokens to be managed when rebalancing by exchanging and providing liquidity in a new range. The downside is that there is a swap fee charged for every rebalance, albeit a small amount.
“Passive rebalancing,” on the other hand, rebalances without swapping, provides as much liquidity as possible with escrowed tokens, and then provides the remaining tokens as one-sided liquidity. I'm not sure about one-sided liquidity, but the gist is the same as a limit order, which is to provide liquidity within the bounds of turning remaining tokens into remaining tokens.
For example, the image below shows the image of 2500 USDC and 1 ETH under the control of Vault, providing liquidity with 1 ETH and 2000 USDC, and providing unilateral liquidity with the remaining 500 USDC.
At this time, if the price of ETH fluctuates from 2000USD to 1750USD, the liquidity part will play a role, and the surplus USDC will gradually be converted into ETH.
Although there is an advantage that there is no fee because it does not exchange rebalancing, but if the market price continues to fluctuate to bulls or bears (unilateral liquidity) for a long time, compared with active rebalancing, the fees obtained will be reduced because the sex part is not works & the mobility of both parties is also reduced).
How to determine the scope
How to determine the scope of rebalancing is more important than the method of rebalancing.
If you only consider commission income to write something ideal, if rebalancing is once a day, it is best to set a price range that moves within 24 hours (strictly speaking, it is uniform within the price range). Not enough assumptions, such as swapping, only God knows how the price will move).
If it's ideal to write only considering IL (unpaid loss), it's better to make it an infinitely wide range.
cost
cost
The Performance Fee is charged from Uniswap v3's LP Fee and is used to rebalance gas bills and buy back governance tokens, but it's important to note that fees need to be considered when considering strategies.
For example, suppose Vault1 has a wide scope (low LP Fee/small IL) and Vault2 has a narrow scope (high LP Fee/large IL). At this point, if Vault 1 and Vault 2 have the same 10% fee and the same performance (LP Fee-IL), Vault 2 will pay more, which is not advisable for users.
rebalancing timing
"Timing to rebalance" may also become important when competition intensifies in the future. The reason is that the timing of rebalancing is the timing of compound commission income and the timing of accepting IL.
Furthermore, the one-sided liquidity part of passive rebalancing becomes completely useless when the market moves in one direction. Therefore, if rebalancing is performed, unilateral liquidity will be established again based on the current price, making it easier to obtain commission income. However, if it is overdone, on the one hand, there will be a situation of "sell low and buy high", so I think there are disadvantages.
Introducing Safe
1. Alpha Vault
Alpha Vault is the original vault that launched v0 on May 7, two days after v3 was released.
I passed my audit the other day and launched two new vaults (filled) up to $1M on July 2nd.
Rebalance method: passive rebalance range: the range width specified by the development team centered on TWAP
Fees: 5% of fee income
image description
(Image source Dune Analytics)
What you can read from here is that you can suppress IL and earn steadily by expanding your range. Even if the market price fluctuates suddenly, it is considered to have little loss.
By the way, the range width is said to be determined by backtesting.
Alpha Vault official website: https://alpha.charm.fi/
2. Visor Finance (active liquidity management)
Visor Finance's Active Liquidity Management launched in beta on May 18. We also started an organization called Gamma Strategies to fund strategy research (actually unknown).
Rebalancing method: passive rebalancing (swap according to the situation)
Range: Range width based on Bollinger Bands
Fee: 10% of commission income (for $VISR buyback)
Visor Finance shows the range on the website. It's thin and hard to see, but the Bollinger Bands are greyed out and you can read it as you move the cursor, as if the range was set against the Bollinger Bands.
Quote: https://vault.visor.finance/analytics?view=usdt-eth
image description
(Image source Dune Analytics)
This is self-explanatory, but clearly different, which I don't find very honest (note the different durations of the graphs).
The strategy seen on-chain is to specify a narrow range and accept IL while earning high commissions.
concern
concern
Worrying is the recent pull-like incident where the contract owner's address withdrew $500,000 ($3m TVL) from the Vault and sent it to Tornado.cash.
To summarize the case of Visor, the attacker does not understand that if he wants to get rid of the full amount, he has to get rid of the liquidity once. He said he was not a team member (interpreter).
BTW, the $500,000 was paid for by treasury funds, and 2of4 multisig was introduced for the owner address (I doubt 2of4 multisig makes sense in a private key compromise level management system).
Visor Finance official website: http://visor.finance
3. Sorbetto Fragola
Originally a cross-chain liquidity management product, Popsicle Finance launched Sorbetto Fragola on June 26 to manage v3 liquidity.
Rebalancing method: Active rebalancing Range: The range width specified by the development team centered on TWAP
Fee: 10% of commission income (used to repurchase $ICE)
image description
(Image source Dune Analytics)
I don't know how to determine the range width, but the width is somewhere between Charm and Visor. It's just launched and probably doesn't have a solid strategy, but it seems like the direction is to reduce the number of rebalances since swap fees are charged for each rebalance.
Popsicle Finance official website: https://popsicle.finance/dashboard
4.Harvest Finance
Many of you may know that Harvest Finance actually offers Uniswap v3 Vault. This vault, on the other hand, does not rebalance, only charges fees and manages compounding, so the system is slightly different than the vaults covered in this article.
By the way, when the range changes drastically, developers deploy treasuries of different ranges, and users who are happy with it deploy liquidity.
Quote: https://harvest.finance/
Harvest Finance official website: https://harvest.finance/
From now on, introduce products that have not yet been launched (for users of major pools).
5.Gelato Network（G-UNI）
G-UNI provided by the Gelato Network protocol is currently used for liquidity supply management and liquidity mining of InstaDapp's governance token INST-ETH.
Other pairings will be available in the future with Sorbet Finance provided by Gelato.
Rebalancing method: active rebalancing
Scope: The scope specified by the developer (it is written on Medium at a glance, the details are unknown)
Fees: 10% of fee income
I've written an article about Gelato Network before, but my target is a network of bots executing smart contracts, this time the bots are performing rebalancing.
Detailed introduction of Gelato Network: vividot-de.fi
6.Aloe Capital
Aloe Capital claims to be an "autonomous crowdsourced liquidity distribution protocol".
The basic idea of Aloe Capital is to use prediction markets to determine the scope of rebalancing.
Users can be divided into two categories: "Liquidity Providers" and "Stakers". Of course, a "liquidity provider" is someone who wants to earn a commission for using Vault and let it go.
Then what the "staker" does is to use Aloe Capital's governance token Aloe to predict the price of the target asset. The scope for rebalancing is determined by aggregating stakeholder expectations. In addition, if the prediction is correct, the aloe as a reward will increase, and if the prediction is incorrect, the aloe will decrease.
Interestingly, traditional price forecasting is a zero-sum game (a subtraction game taking into account floor fees), whereas in the case of Aloe Capital it becomes a sum game by taking a portion of the commission revenue.
Rebalancing Method: Passive Rebalancing Scope: Aggregation of Staking Price Predictions
Fees: 17.5% of commission income (7.5% for each pool’s reserves, 5% for development and operations, and 5% for stakers)
In addition, "Dutch Auction" and "Liquidity Sniping: Large-scale purchase of TX with one-side liquidity strike by robot" are being considered to promote the rebalancing of the part that has become one-side liquidity.
The worry is that there are not enough users who make price predictions as "stakers", so "liquidity providers" do not gather, and "liquidity providers" don't gather, so "stakers" don't gather. May be the protocol will not work due to the spiral.
Aloe Capital official website: https://aloe.capital/
7. Lixir Finance
Probably the first to get the initiative out to the media, but at the time of writing it has not yet launched.
The contract has already been executed and audited, so there is a good chance it will be rolled out soon.
In addition, we have sold our governance token LIX, raising $1.7 million for the private sale and $3.27 million for the LBP. BTW, LBP ended up selling for $8.03, but has now dropped to around $4 due to the naked market and delayed launch ($1.53 for private placement).
Without any real work, I think I took a quick look at the source code for rebalancing, and the strategy is as follows.
(I make no guarantees, as I feel the implementation differs from the mechanism mentioned in Medium.)
Rebalancing Method: Passive Rebalancing Range: TWAP-centered range + unilateral range at current price
Fees: dependent variable unknown (for $LIX repo)
Lixir Finance official website: https://lixir.finance/
8. Mellow protocol
Since Twitter was frozen and Telegram was also banned from writing, the existing information on the official website reads "Mellow Protocol is an optimized solution for UNI V3 liquidity provision.
Looking at the white paper, our goal is to "realize financial derivatives on Uniswap v3", as the first step, we will implement leveraged liquidity supply (original text: leveraging LP-ing).
The initial leveraged liquidity supply and liquidity provision optimization seem to be slightly different, so the policy may change.
I did not follow the formula in the white paper, so please take a look if you are interested.
Mellow official website: https://mellow.finance/vault
9. Sommelier Finance
Sommelier Finance provides an interface that makes it easier for users to add liquidity to v3 (such as swapping to a range when providing liquidity).
Currently it's just an interface, so if it goes out of range the user will have to rebalance it himself, but he plans to use Sommelier to do it automatically in the future.
For more information about Sommelier Finance, please refer to the official website information.
Sommelier Finance official website: https://sommelier.finance/
10. Steer Protocol
There is no documentation or white paper, but the Steer Protocol product was recently selected by Sushiswap as the Sushi Incubator.
sushichef.medium.com
Roughly explaining the product, I feel that users can create a strategy that uses any DeFi, participate in the strategy, and execute the strategy.
Uniswap v3's automatic liquidity management is one such strategy.
To be honest, I think this product is too flashy and looks luxurious, but I had high expectations for it since it was selected as a sushi incubator.
Steer Protocol official website: https://steer.finance/
at the end
Here is the full capture of the Uniswap V3 LP Vault (Automated Manager).
When v3 was released, due to the concentration of liquidity, the handling fee was XXX times! However, the reality is not sweet, I feel that in the main pool considering IL, the performance is worse than v2.
So I think if you want to provide liquidity for v3, you can use Vault in the main pool, or develop a small pool and maintain it manually.
On the other hand, the reality is that the performance of Vault introduced in this article is not as high as imagined, and adding it does not mean that you will make a lot of money. When actually using Dune Analytics to calculate performance, although the strategy is different, each vault will be affected by IL, and according to the time period, the performance of v2 LP (not considering LP Fee) is higher.
V3 Vault Data: duneanalytics.com
In the end, the question is, "Where should I really be using Vault?", but when comparing performance over a recent period, it looks like Charm > Fragora > Visor.
Of course, I can't be sure, but I think that's generally the case, because the cost that doesn't consider performance is also deducted from here.
In addition, the Fee Based APR displayed by some Vaults is very high, completely ignoring the existence of IL (finance) on the official website, and it is difficult to recommend if it is not sincere.
Performance needs to be looked at over a longer range, so I'd like to keep an eye on that, but from the results so far, it's interesting that the wider the range, the better the performance.
I'm mostly interested in Aloe Capital, but considering IL, I shouldn't just get to that range, I'd like to know how to get there.
